Marius Kloppers's jump towards so-called 'unconventional' shale gas fits BHP's insistence on owning large, low-cost assets
Marius Kloppers's vow of abstinence didn't last long. A week after seemingly eschewing deals to concentrate on a five-year $80bn (�50bn) internal capital expenditure programme, BHP Billiton's chief executive forked out $4.75bn to buy a large shale gas asset in Arkansas from Chesapeake Energy.
Actually, there is no great inconsistency there. Kloppers's vow wasn't written in stone and, anyway, it covered only mega-deals, such as the tilt at Rio Tinto in 2008 and last year's failed assault on Potash Corporation in Canada. Exclusion clauses were always assumed to apply to opportunities to get bigger in oil and gas. It just appeared doubtful that BHP could find bargains ? the company has been a notable absentee from the bidding for BP's post-Macondo cast-offs.
Kloppers's answer is a jump towards so-called "unconventional" shale gas. This fits BHP's insistence on owning large, low-cost assets ? at a stroke, its probable oil and gas reserves will rise 45%. Sceptics (such as Gazprom) wonder whether the technological challenges will keep costs in shale gas low indefinitely, but Kloppers doesn't doubt the importance of this market. "Shale gas hasn't increased the gas resources of the earth by 10%, it has increased it by an order of magnitude," he said last week.
At Chesapeake, BHP was in the happy position of finding a company where an activist investor ? old warrior Carl Icahn ? was lobbying for disposals. There was a deal to be done. The price for the Fayetteville interests doesn't look obviously cheap but nothing in shale gas is these days. BHP can at least boast convincingly about solid profit margins at current market prices. For now, investors will be happy with that: Kloppers's thirst for diversification is satisfied (at least for a while) and there's still enough cash for the $10bn share buyback.
Source: http://www.guardian.co.uk/business/2011/feb/22/bhp-billington-buys-chesapeake
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